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Scenario 8.1: Juan used to work for a law firm where he earned a yearly salary of $50,000. He got tired of working for another firm so he opened his own law office. He now pays his secretary $20,000 per year and spends $25,000 for rent and utilities. He earns $100,000 in annual revenue. Refer to Scenario 8.1 above. Juan's opportunity cost (economic costs) of running his own business is

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Final answer:

Juan's opportunity cost of running his own law practice is $95,000, comprising of explicit costs for secretary salary and utilities ($45,000), and the implicit cost of his former salary ($50,000). With a revenue of $100,000, his economic profit is $5,000, indicating the business is economically viable.

Step-by-step explanation:

The calculation of Juan’s opportunity cost (economic costs) of running his own business involves considering both explicit and implicit costs. Explicit costs for his business include the secretary’s salary ($20,000) and expenses for rent and utilities ($25,000). However, the implicit cost, which is the foregone salary from not working at his previous firm, is $50,000. To find the total economic costs, we must add these up:

Explicit costs: Secretary’s salary + Rent and utilities = $20,000 + $25,000 = $45,000

Implicit costs: Foregone salary from previous employment = $50,000

Total economic costs: $45,000 (explicit) + $50,000 (implicit) = $95,000

Knowing the total economic costs helps to understand whether Juan’s law office, which generates $100,000 in annual revenue, is economically successful. Subtracting the economic costs from the revenue gives us:

Economic profit: Revenue - Economic costs = $100,000 - $95,000 = $5,000

If Juan’s economic profit is above zero, then his business venture is considered economically viable.

User Jekin Kalariya
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6 votes

Answer:

$0

Step-by-step explanation:

Juan's opportunity cost (economic costs) of running his own business is $0 . This is because Juans main costs for running his business are paying his secretary $20,000 per year and spending $25,000 for rent and utilities. Adding this up totals $45,000 but Juan makes a total of $100,000 a year with his business. This means that

$100,000 - $45,000 = $55,000

He is making a total of $55,000 a year with his business. Since he was only making $50,000 a year in his previous law firm this means that he is making $5000 more than his previous law firm with his own business. Therefore, making the opportunity cost $0 since the opportunity that he chooses is more valuable than the opportunity that he left behind.

User AbdAllah
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